Catastrophe risk modeling firm AIR Worldwide (AIR) released the industry's first Multiple Peril Crop Insurance (MPCI) Model for China.

The new model provides a fully probabilistic approach for determining the likelihood of losses to the country's major crops: corn, cotton, rapeseed, rice, soybeans, and wheat.

The model captures the significant effects that weather-related perils have on each crop during the growth stage. This detailed information will help companies better prepare for and understand the exposure they carry based on China's specific insurance programs, which tend to vary by province.

"China is a growing agriculture market with premiums second only to the U.S.," said Dave Wolfe, executive vice president of global reinsurance at AXIS. "AIR's China crop model captures the impact of weather on individual crops and insurance programs that vary by province. The fully probabilistic model is scientifically advanced and accounts for the unique challenges of modeling agricultural risk in China."

Because traditional methods have proven unreliable in quantifying and managing this complex risk, AIR has leveraged its considerable experience and success in modeling MPCI portfolios in the United States to develop a model for China.

The AIR MPCI Model for China employs AIR's advanced Agricultural Weather Index (AWI) to accurately capture the severity, frequency, and location of adverse weather events, while also correctly preserving the timing of events during the season.

The AWI takes into account weather variables (such as precipitation and temperature), soil conditions (such as available water capacity, surface moisture, and runoff), and crop-specific parameters (such as requirements at critical stages of crop growth, planting and harvesting dates, and resiliency to adverse weather conditions).

The model explicitly models damages resulting from various weather perils, including drought, floods, and typhoons, which are the leading causes of loss in China.

The model was developed using data from various local agencies, including the China Meteorological Administration and the Shanghai Typhoon Institute. Furthermore, each crop has a different growing season and a different vulnerability to adverse weather conditions.

To capture the full range of potential damaging events that could occur in a growing season, AIR uses detailed crop-specific information, weather data, and soil information at county-level resolution to develop fully probabilistic loss estimates based on a company's crop-specific exposures at the county or province level.

"In the past, estimating the likelihood and magnitude of future crop losses presented significant challenges," said Dr. Gerhard Zuba, senior principal scientist at AIR Worldwide.

"Traditional approaches rely largely on historical losses, but the usefulness of such data is limited - in part because high-quality historical claims data is scarce. Furthermore, in China, the crop insurance landscape is constantly evolving: insurance penetration is growing rapidly, policy conditions and premiums are changing, and new technologies are being introduced to improve crop yields."

The AIR MPCI Model for China also:

•Provides the industry's first fully probabilistic approach for determining the likelihood of losses arising from the perils covered under the current Chinese crop insurance program

•Accommodates complex policy conditions (Insurance policy conditions in China are dependent on the crop's stage of development. Policy conditions and programs also vary depending on crop type, peril, and province.)

•Leverages the AIR Northwest-Pacific Basinwide Typhoon Model to capture damage to crops and the resulting monetary losses caused by typhoon wind and precipitation

•Enables user input of crop-specific exposures at the county or province level

The AIR Multiple Peril Crop Insurance Model for China is currently available in CATRADER , the industry standard application for analyzing catastrophe reinsurance and insurance-linked securities, and can also be used to assess a portfolio of crop insurance programs and assess combined risk to property exposed to typhoons.